No time like the present to address your bad credit

By Maryalene LaPonsie, CardRatings contributor

Updated, March 16, 2015

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We usually don't think about fixing our finances until after Jan. 1. That's about the time we wake up from the excesses of the holiday season and vow to buckle down.

But if you have bad credit, you are missing out on a prime opportunity to clean up your score by waiting until after the new year to make changes. Instead, follow these tips and make some smart spending decisions to have you on the right track before we even hit the first note of "Auld Lang Syne."

1. Clean up mistakes

Most people who have bad credit have made their own financial mistakes. They don't need credit report errors bringing them down, too. A report from the Federal Trade Commission earlier this year found as many as 20 percent of consumers have an error on at least one of their three major credit reports, and 5 percent have errors that could result in them paying higher interest rates.

Go to www.annualcreditreport.com to request free copies of your credit report from each of the major credit bureaus. You are entitled to one free copy a year, and this is the only government-authorized site. Other sites may provide your reports but there is typically a catch, such as signing up for a credit monitoring program or a similar subscription service.

2. Have a plan for your money

You'll never clean up your bad credit unless you have a plan for your money, and what is a plan for your money? You guessed it! I am talking about a budget.

If budgeting scares you, it could be that you are thinking about it the wrong way. You don't need spreadsheets, a workbook or even a software program. You need a sheet of paper with your net income written at the top. Then underneath it, you list where you are planning to spend (or save!) that money until you hit zero.

There are lots of online resources available to help with budgeting so I won't go into the details here. However, you need to have a written budget if you want to clean up your bad credit -- even if there is no money left after you account for the monthly bills.

3. Shop smart for the holidays

Once you have your budget in place, you should know exactly how much you have to spend on holiday gifts. In fact, your December budget should have a line that says "Holiday Gifts" or "Holiday Food" or "Money I Am Going to Blow for the Holidays." You get the idea.

If your budget is so tight you have nothing left to put into this category, you have two choices: either have a handmade Christmas that doesn't involve spending, or find a source of money. That could mean eating from the pantry instead of going grocery shopping, selling items on Craigslist or picking up a seasonal job for a few weeks.

Let's assume you are picking the second option. Now, you need to start applying for credit card offers for bad credit. These could include secured credit cards or prepaid credit cards, but there are two very important things you want to find.

Credit bureau reporting: Make sure your card issuer will report your payments to the three major credit bureaus. If they don't, they won't do a lick of good for your credit score.

Reasonable interest rate and fees: If you have bad credit, you are going to pay higher interest rates and fees, no doubt about it. But that is no reason to let yourself be abused. Compare the best credit cards for bad credit to find one that has the lowest possible rate and the fewest fees.

With your card, you are going to buy your holiday gifts, but you are only going to spend that amount listed on your budget. Then, when the bill arrives, you are going to pay it off immediately.

Voila! You are on your way to good credit, and the calendar hasn't even turned to 2014 yet. Keep spending and paying off a manageable amount each month and you'll not only create healthy spending habits, you'll see your credit score go from bad to better to the best.

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